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How to trade government bonds

For many people, a government bond is a long-term investment opportunity, offering steady returns with low risk. But the inverse relationship between bonds and interest rates – not to mention other factors that impact bond prices – can also make them an intriguing trading opportunity for CFD traders and spread bettors.

Here’s a quick rundown of the differences between the trading government bonds and investing in them.

Trading bonds

Investing in bonds

Speculate on bond price movements over the short and medium term

Hold government bonds over the long term

Buy a bond if you think its price will rise, or sell if you think it will fall

Buy bonds, with the risk of losing out if bond prices fall

Profit only from bond price movements

Profit mostly from regular interest payments

Take advantage of leverage - which can amplify both profits and losses

Put down the full value of the position

Trade with a leveraged provider

Trade with a bond broker

If you’re interested in investing in the fixed income market but you don’t want to have to go through a bond broker, exchange-traded funds (ETFs) can offer similar returns but with added liquidity and transparency. Find out more out investing in government bond ETFs.

How to trade government bonds via CFDs or spread betting

1. Open your account

To trade bonds, you’ll need an account with a leveraged provider. You can open an account in minutes, and you’ll be given the option to choose whether you’d like a spread betting or CFD trading account – or both – at the outset.

There’s no obligation to fund or trade when you open a leveraged account, but you will need to deposit some funds before you open your first position. Doing so is simple, with options to add funds via a bank transfer, debit or credit card, or PayPal.

2. Choose your bond

When investing in bonds, choosing a bond that pays in out a different currency to your own raises the issue of currency risk. But when trading bonds, you’re free to buy or sell assets from around the world. IG’s platform, for instance, offers access to a wide range of government bonds, including:

Bund, Buxl and Schatz prices from Germany

Both long and short-term UK gilts

Two, five and ten-year T-notes from the US, as well as treasury bonds

Bonds from Italy, France and more

3. Decide when you want to trade

Once you’ve chosen the government bond you’d like to trade, it’s time to decide when you’d like to open your position. Timing the opening and closing of trades has a major part to play in dictating how successful you are on the markets.

The key to timing your trading is understanding what moves government bond prices. The biggest factor in government bond volatility is usually interest rates – and many traders will use bonds as a way of speculating on whether interest rates will go up or down.

Say, for example, that you believed that the FOMC was going to announce a surprise interest rate hike at its next meeting. An interest rate rise would typically cause US treasuries to fall, so you could open a short position just before the announcement.

4. Open your position

Once you’ve decided on your first trade, you’ll need to open your position using your provider’s online trading platform.

Once you’ve logged into the platform, find your chosen bond market by either searching for it or navigating through the available markets. Then you can open a deal ticket to choose how much you’d like to stake on the position, and whether you’d like to go long or short.

You might also want to consider adding a stop or a limit here. Stops automatically close your position once it moves a certain number of points against you, while limits close your position once it moves a certain number of points in your favour. Both can be hugely useful as part of your risk-management strategy.

5. Close your position

Assuming that your trade hasn’t been closed automatically by a stop or limit, you’ll want to close it yourself to either take profits or cut your losses.

You close a CFD or spread bet position by making the opposite trade to the one you used to open it. So if you bought a government bond to open your trade, you’d sell in order to close it. To calculate your profit or loss, subtract the opening price of your position – the buy price for long trades, and the sell price for short trades – from the closing price.

Practise trading government bonds

If you’d like to trial your government bond trading strategy – or see how bond trading works – without committing any capital, open a demo account.

You can use a demo account to trade on live government bond prices in a completely risk-free environment. It comes preloaded with £10,000 in virtual funds that you can use to practise trading government bonds as well as indices, shares, commodities, forex and more.

Similar markets to government bonds

Corporate bonds

When you buy a government bond, you are loaning your capital to whichever government issued the bond. Corporate bonds work in the same way, but you are instead loaning your capital to a company. Corporate bonds are usually riskier than government bonds, though, because of the increased likelihood of a company having to default on its loans.

Interest rates

Instead of speculating on interest rate movements via bonds, many leveraged trading providers will offer direct exposure to key interest rates from around the world. Using IG’s platform, for instance, you can open a long or short position on euribor, short sterling (LIBOR) and many other rates.

Gold

Like government bonds, gold's price will often go up when interest rates are falling, and drop when interest rates are on the rise. It is also a popular market in times of economic uncertainty, because it is viewed as a lower-risk investment – just like many government bonds.

Open an account now

It's free to open an account, takes less than five minutes, and there's no obligation to fund or trade.

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Professional clients can lose more than they deposit. All trading involves risk.

The value of shares, ETFs and ETCs bought through a share dealing account, a stocks and shares ISA or a SIPP can fall as well as rise, which could mean getting back less than you originally put in. Past performance is no guarantee of future results.

CFD, share dealing and stocks and shares ISA accounts provided by IG Markets Ltd, spread betting provided by IG Index Ltd. IG is a trading name of IG Markets Ltd (a company registered in England and Wales under number 04008957) and IG Index Ltd (a company registered in England and Wales under number 01190902). Registered address at Cannon Bridge House, 25 Dowgate Hill, London EC4R 2YA. Both IG Markets Ltd (Register number 195355) and IG Index Ltd (Register number 114059) are authorised and regulated by the Financial Conduct Authority.

The information on this site is not directed at residents of the United States, Belgium or any particular country outside the UK and is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.